Autobiography

As the children of immigrants, my parents were raised in Scandinavian Minnesota. My mother, Verna Ecklund, was a university student for only one year but my father, Thomas Peter Mortensen, graduated from the School of Forestry at the University of Minnesota in 1936. They were married shortly after and moved to Enterprise, Oregon, where I was born in 1939. Enterprise, located in the far northeastern corner of the state, was in cattle ranching country surrounded by one of the most beautiful mountain ranges in the U.S. In these mountains, my father began his career as a lookout officer for the U.S. Forest Service. In the war years, they migrated further west to the Portland area where Dad help build Liberty ships in Mr. Kaiser’s ship yards and Mom provided day care for the children of Rosy the Riveter. After the war, the family, which now included my brother Arne born in 1942, moved to the Hood River Valley 60 miles east of Portland where again my father returned to the practice of forestry. There my brothers and I, who included Irving born in 1947, were raised.Search frictions;

Island Matching

A synthesis of the Lucas-Prescott island model and the Mortensen- Pissarides matching model of unemployment is studied. By assumption, all unmatched workers and jobs are randomly assigned to islands at the beginning of each period and the number of matches that form on a particular island is the minimum of the two realizations. When calibrated to the recently observed averages of U.S. unemployment and vacancy rates, the model fits the observed vacancy-unemployment Beveridge relationship very well and implies an implicit log linear relationship between the job finding rate and the vacancy-unemployment relationship with an elasticity near 0.5. The constrained efficient solution to the model is decentralized by a equilibrium outcome in which wages on each island are determined by a modified auction. Although the efficient solution explains only about 25% of the observed volatility in the U.S. vacancy-unemployment ratio, an equilibrium outcome in which wages are determined as the solution to a strategic bargaining game explains almost all of it.

Modeling Matched Job-Worker Flows

What can one infer about labor market flows from matched employer- employee panel data? The purpose of this paper is to sketch possible answers to this question. A general but simple labor market equilibrium model of hire and separation flows is developed in the paper. The model embodies the hypothesis that worker productivity differs across employers and that worker and employer flows reflect responses to these differences in a labor market characterized by friction. In the modeled market, each agent acts optimally taking as given the wage offer distribution and market tightness and these in turn are determined by their collective action. The existence of a labor market equilibrium is established under two different wage determination models: rent sharing and wage posting. A demonstration that market flow parameters, search and recruiting effort functions, and the equilibrium wage distribution can be estimated with matched job-work flow data is the principal contribution of the paper.

Equilibrium Wage and Employment Dynamics in a Model of Wage Posting without Commitment

A rich but tractable variant of the Burdett-Mortensen model of wage setting behavior is formulated and a dynamic market equilibrium solution to the model is defined and characterized. In the model, firms cannot commit to wage contracts. Instead, the Markov perfect equilibrium to the wage setting game, characterized by Coles (2001), is assumed. In addition, firm recruiting decisions, firm entry and exit, and transitory firm productivity shocks are incorporated into the model. Given that the cost of recruiting workers is proportional to firm employment, we establish the existence of an equilibrium solution to the model in which wages are not contingent on firm size but more productive employers always pay higher wages. Although the state space, the distribution of workers over firms, is large in the general case, it reduces to a scalar that can be interpreted as the unemployment rate in the special case of homogenous firms. Furthermore, the equilibrium is unique. As the dimension of the state space is equal to the number of firms types in general, an (approximate) equilibrium is computable.wage dispersion, wage setting, rank-preserving equilibrium

More on Unemployment and Vacancy Fluctuations

Shimer (2005a) argues that the Mortensen-Pissarides equilibrium search model of unemployment explains only about 10% of the response in the job-finding rate to an aggregate productivity shock. Some of the recent papers inspired by his critique are reviewed and commented on here. Specifically, we suggest that the sole problem is neither the procyclicality of the wage nor the failure to account fully for the opportunity cost of employment. Although an amended version of the model, one that accounts for capital costs and counter cyclic involuntary separations, does much better, it still explains only 40% of the observed volatility of the job-finding rate. Finally, allowing for on-the-job search does not improve the amended models implications for the amplification of productivity shocks.

An Empirical Model of Growth Through Product Innovation

Productivity dispersion across firms is large and persistent, and worker reallocation among firms is an important source of productivity growth. The purpose of the paper is to estimate the structure of an equilibrium model of growth through innovation that explains these facts. The model is a modified version of the Schumpeterian theory of firm evolution and growth developed by Klette and Kortum (2004). The data set is a panel of Danish firms than includes information on value added, employment, and wages. The model's fit is good and the structural parameter estimates have interesting implications for the aggregate growth rate and the contribution of worker reallocation to it.labor productivity growth; worker reallocation; firm dynamics; firm panel data estimation

Productivity Growth and Worker Reallocation: Theory and Evidence

Dispersion in labor and factor productivity across firms is large and persistent, large flows of workers move across firms, and worker reallocation is an important source of productivity growth. The purpose of the paper is to provide a formal explanation for these observations that clarifies the role of worker reallocation as a source of productivity growth. Specifically, we study a modified version of the Schumpeterian model of growth induced by product innovation developed by Klette and Kortum (2002). More productive firms are those that supply higher quality products in the model. We show that more productive firms grow faster and the reallocation of workers across continuing firms contributes to aggregate productivity growth if and only if current productivity predicts future productivity. We provide evidence in support of the hypothesis that more productive firms become larger in Danish data. In addition, we provide estimates of the distribution of productivity at entry and the parameters of the cost of investment in innovation function and other structural parameters that all firms are assumed to face by fitting the model to observations on value added, employment, and wages drawn from a panel of Danish firms for the years 1992-1997.

Taxes, Subsidies and Equilibrium Labor Market Outcomes

We explore the effects of taxes and subsidies on job creation, job destruction, employment, and wages in the Mortensen-Pissarides version of the search and matching equilibrium framework. Qualitative analytical results show that wage and employment subsidies increase employment, especially of low skill workers, and also increase wages. A job creation or hiring subsidy reduces unemployment duration but increases incidence with an ambiguous effect on overall employment. A firing tax has the reverse effects but the same indeterminacy. In the special case of a competitive search equilibrium, the one in which search externalities are internalized, there is a first best configuration: no tax on the wage, an employment subsidy that offsets the distortions on the job destruction margin induced by unemployment compensation and employment protection policy, and a hiring subsidy equal to the implicit tax on severance imposed by any form of employment protection, with the costs of these and other policies financed by a non-distortionary consumption tax. Computational experiments confirm this ideal also determines the direction in which marginal improvements can be made both in terms of efficiency and in terms of improving low skill worker employment and wage outcomes.